Paying for Health Care

Representative Paul Ryan’s (R-WI) plan to address the U.S. federal deficit is an opportunity to reflect on fundamental questions of what we’re trying to buy and how much we’re willing to spend when it comes to the role of the government in health care.

Let me begin with two premises that I take as given.

(1) The historical growth of federal expenditures on health care is unsustainable. Over the last 20 years, Medicare and Medicaid expenditures grew at an 8.4% continuously compounded annual rate (data source: CBO). That’s 3.75% faster per year than GDP grew, and for that difference in growth rates, federal health care expenditures as a percentage of GDP would double every 18.5 years. If those historical growth rates were to continue, federal health expenditures would rise from their current 5.4% of GDP to 10% of GDP by 2027 and 20% of GDP by 2045. Something has to give.

(2) Changing the path requires denying some medical services for someone who would otherwise receive them. Many of the partisan advocates try to claim that their proposal can solve the problem by eliminating inefficiencies or fraud. I am not going to deny that there is some potential for improvement. But pretending that this is the sole issue we need to address is a disservice. The basic reality is that we have found some ways to prolong life and reduce suffering that are very, very expensive. What we need, in my opinion, is a social and moral framework for deciding which of these are worth doing and which are not.

And there are three ways to determine which medical services don’t get provided.

(a) The government can limit the procedures it will pay for and the people who are eligible to receive them.

(b) The insurance company or other third party can limit the procedures they will pay for and the people who are eligible to receive them.

(c) If (a) and (b) both say no and you don’t have the money yourself to pay for it, then you do not receive the treatment.

Each of those options is morally troubling to many of us. But reality forces us to choose some mix of the three. Pretending that there are no tough choices just digs us deeper into a debt that can’t be repaid.

The radical aspect of Ryan’s plan is, instead of specifying which procedures the government will pay for, the government limits the dollar amount that it will contribute, beyond which, it’s left to (b) and (c). Here are key elements of the plan as communicated by Ryan’s staff to the CBO:

Starting in 2022, the proposal would convert the current Medicare system to a system of premium support payments… The payment for 65-year-olds in 2022 is specified to be $8,000, on average, which is approximately the same dollar amount as projected net federal spending per capita for 65-year-olds in traditional Medicare under current law in that year. People who become eligible for Medicare in 2023 and subsequent years would receive a payment that was larger than $8,000 by an amount that reflected the increase in the consumer price index for all urban consumers (CPI-U) and the age of the enrollee.

Transition Medicare, starting in 2018, to a “premium support” program that limits growth in per-beneficiary federal support (to GDP-plus-1 percent, as compared to current projections of GDP-plus-1.7 percent). The new system maintains traditional Medicare as the default, but will charge higher premiums if costs rise faster than the established limits. Alternatively, beneficiaries can opt to purchase a private plan on a health insurance exchange.

We can and should debate how much we’re willing to spend on health care and the form in which it will be delivered. But changing from a system in which we pretend we can provide everything for everybody to one in which we explicitly acknowledge the limits on how much we’re willing and able to spend is in my opinion a necessary step to bring the long-run U.S. fiscal path to sustainability.

Originally published at Econbrowser and reproduced here with permission.